Wednesday 13 December 2017

Restoring confidence -- and quickly -- is priority

The sluggish approach to getting borrowing under control is reminiscent of the 1980s, writes Colm McCarthy

Colm McCarthy

Colm McCarthy

The unsurprising decision by the European Central Bank last Thursday to increase its main interest rate needs to be seen in context. Press comment has focussed almost entirely on the woes of mortgage borrowers.

The policy rate will now be 1.25 per cent and even with a sequence of further increases expected over the balance of the year the rate will still be low by historical standards in a year's time. While any increase is unwelcome for Ireland and the other recession-hit peripheral economies, it is less than a disaster for most mortgage borrowers. More than half are on tracker rates. Trackers dominated through the market frenzy of 2005 to 2007 but for the last two years the lucky borrowers have been paying at bargain retail rates of two per cent or a little higher. The deal was the ECB rate plus one per cent or so. Tracker rates have fallen sharply in line with the ECB rate since the loans were taken out. Some holders of trackers are doubtless in negative equity, but are paying far less than they bargained for and are not under the same cash-flow pressure as are less fortunate borrowers on variable rates, whose monthly payments have been rising. The banks are losing money on trackers and are unable to do anything about it. But they are free to make up these losses by upping their variable rates and have chosen to do so.

Luckiest of all are those who re-financed older mortgages into trackers during the credit bubble. Many of these folks should be in clear positive equity even with the decline in house prices and are enjoying rock-bottom interest costs as well. There have been silent winners as well as vocal casualties in the Irish mortgage lottery. The media, including the taxpayer-financed public service broadcaster, can always be relied upon to ensure a loud voice to the losers and a discreet silence for the winners.

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